1.1 Overview

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module. The activity is peer reviewed, so after you submit your responses, you will review submissions by fellow learners in the course.

1.2 Review criteria

For Assignment #1, you will be responsible for evaluating the submissions of THREE of your peers. Before evaluating, please see the video I prepared with my discussion of the answers to Assignment #1.

Assignment #1 is worth 100 points total. Points are only given for correct/reasonable answers in the manner specified below, incorrect/unreasonable answers get zero points. Points should be allocated as follows:

Question 1

• 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
• 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph)

Question 2

• 10 points for correctly identifying the package that is most likely to lead to shareholder value maximization and a reasonable explanation based on the arguments we discussed in the lectures
• 5 points for choosing the wrong compensation package but justifying the choice with a reasonable argument, or for a correct answer that is too long (longer than 1 paragraph)
• 2 points for correctly identifying the package but including no explanation

Question 3

• 10 points for the correct liquidity ratios for all years and both companies
• 5 points for an answer that is partially correct, for example not calculating the ratios for all years, or making a mistake on one of the ratios.

Question 4

• 10 points for the correct leverage ratios for both companies
• 5 points for an answer that is partially correct, for example not calculating all the leverage ratios, or making a mistake on one of the ratios.

Question 5

• 10 points for the correct profitability ratios for all years and both companies
• 5 points for an answer that is partially correct, for example not calculating the ratios for all years, or making a mistake on one of the ratios.

Question 6

• 10 points for the correct cash profitability ratios for all years and both companies
• 5 points for an answer that is partially correct, for example not calculating the ratios for all years, or making a mistake on one of the ratios.

Question 7

• 10 points for the correct analysis of the cash flow statement for both companies
• 5 points for an answer that is partially correct, for example making a mistake on the analysis of investment cash flows

Question 8

• 10 points for the correct valuation ratios for both companies
• 5 points for an answer that is partially correct, for example not calculating all the valuation ratios, or making a mistake on one of the ratios.

Question 9

• 20 points for a well justified comparison of both companies that is based on the results of questions 3 to 8
• 10 points for a reasonable but incomplete answer, for example not discussing one of the aspects such as valuation or profitability.

Recommendations for Fair Peer Review:

• For questions that require calculations only, the score should be based on whether or not the answer provided is correct.
• For subjective questions, the score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.
• Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
• A clear and concise answer is preferable to a long response that lacks coherence. Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Instructions

There are multiple steps to this assignment.

First, you will submit your answers to each of the 9 questions based on the information in the Assignment Details section. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then Submit the assignment. Please answer each question fully and concisely.

Then, you will evaluate the submissions of at least THREE of your peers based on the instructions provided. You may begin giving feedback to other students as soon as you submit your assignment, click the Review peers tab to begin. Feel free to provide additional reviews beyond the three required!

Assignment 1 is described in Video Lesson 1-10, you should watch this video before doing the assignment.

For questions 3-9 you will need data from the Nike Inc and V.F. Corporation spreadsheets.

table 1.3.1: Financial statement of stock counter NKE.

table 1.3.2: Financial statement of stock counter VFC.

The discussion of the assignment solution is provided in Video Lesson 1-11. Do the assignment on your own first, before viewing the assignment discussion video! Please view the assignment discussion video before completing the review of your peers.

1.4 Reminders

2.1 Question 1

  Explain why maximizing current stockholder wealth is a reasonable objective for the corporation (1 paragraph maximum).

• Stockholder/shareholder invest the money on a corperate and expect the management growth the corperate to generate profit.
• Due to the income of the corperate is generated by staffs since shareholder cannot spend thier time to oversee the operation of a corperate, therefore they hire/appoint a team of management to lead or manage the corperate.
• Shareholders hold the right to sake the management team anytime if the management unable hit the target or vision expected by shareholders.
• A corperate especially a public listed company need to acquire/inject fund from the stock market, the shareholders expected the company can growth and willing to invest. The performance of the management will be evaluate by the shareholders as well. Management level can be dictator only who hold a majority portion of shares and contribute a lot to the corperate. For example, Steve Jobs, Larry Ellison, Bill Gates, Mark Zuckerberg are the soul of their own corperate.

2.2 Question 2

  A company’s board of directors must choose between two alternative compensation packages for top executives. Package 1 includes a fixed salary and an yearly bonus that depends on profits on that year. For example, the CEO gets paid a bonus if profits are higher than a certain target. Package 2 includes a fixed salary, and a certain amount of stock in the company. Which package is likely to be better from the point of view of shareholder value maximization? (1 paragraph maximum).

• Package 1: Normally high salary paid to board of directors can stimulate them to growth the business group since high revnecue and also profit made by the group, the board of directors will also get higher paid.
• However, there has pro and con since fixed salary will induce low quality and inefficiency of the board of directors becasue the salary might not affected by the revenue and also profit made by the group.

• Normally a small and medium conservative busissness group do not take the high risk will offer the package 1. Some companies with a stable and certain business income might also offer package 1.

• Package 2: A large and also some aggresive busissness group normally will offer a certain amount of stock of the company to the board of directors. The board of director will be stimulated and more loyal to growth the business group.
• However the stress given by shareholders to the board of directors will also be high accordingly. The risk of saking is also high since the shareholders provide the rumination pay and expect the board of directors to join the big family, stand with shareholders (same objective and profit sharing from the stocks awarded by shareholders) and struggle and sincerely to growth the business group. You can refer to below articles:
  • Ladbrokes appoints Jim Mullen as Chief Executive Officer
  • Ladbrokes CEO Richard Glynn to step down next year
  • Ladbrokes shareholders rebel over executive pay
  • The Max Attacks: This month I’d fire the CEO of William Hill
  • William Hill faces shareholder showdown over CEO’s £1.2m ‘gift’
• Comparison: package 1 might efficient within short-term period (might be 3 to 5 years or 8 to 10 years) due to high paid, however package 2 might probably get loyalty of board of directors who will stay and growth with the business group long life (might probably 30 to 50 years).

• For example, not only Ladbrokes, William Hill prefer package 2… Maxbet, SBOBet and Crown offer package 2 to the management level and most of them work more than 10 to 20 years compare to William Hill and Ladbrokes.

2.3 Question 3

  Questions 3-9 will ask you to compute, compare, and analyze financial ratios for Nike Inc and V.F. Corporation. The data you need are in the linked spreadsheets.

  Here is some information about the companies from Capital IQ :

  NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories for men, women, and kids worldwide. NIKE, Inc. was founded in 1964 and is headquartered in Beaverton, Oregon.

  V.F. Corporation was founded in 1899 and is headquartered in Greensboro, North Carolina. V.F. Corporation designs, manufactures, markets, and distributes branded lifestyle apparel, footwear, and accessories in the United States and Europe.

  Compute the main liquidity ratios for both Nike and V.F.Corporation (current ratios, quick ratios, and cash ratios). Do this for the last 3 years available. For Nike they will be May 2015, May 2014 and May 2013. For V.F.Corporation they will be July 2015 (latest-twelve months), January 2015, and December 2013.

table 2.3.1: Current ratio of stock NKE.

table 2.3.2: Current ratio of stock VFC.

What is the ‘Current Ratio’?

The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the current total assets of a company (both liquid and illiquid) relative to that company’s current total liabilities.

The formula for calculating a company’s current ratio, then, is:

\[Current\ Ratio = Current\ Assets / Current\ Liabilities\]

The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current assets and liabilities.

You can refer to What is the ‘Current Ratio’ for further details.

What is the ‘Quick Ratio’?

The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is calculated as follows:

\(Quick\ ratio = (current\ assets – inventories) / current\ liabilities\), or \(Quick\ ratio = (cash\ and\ equivalents + marketable\ securities + accounts receivable) / current\ liabilities\)

The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company’s liquidity position. Also known as the “acid-test ratio” or “quick assets ratio.”

Read more: Quick Ratio Definition | Investopedia

Liquidity Measurement Ratios: Cash Ratio

The cash ratio is an indicator of a company’s liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash equivalents or invested funds there are in current assets to cover current liabilities…

Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn’t necessarily a bad thing, so don’t focus on this ratio being above 1:1…

• Liquidity Measurement Ratios: Introduction
• Liquidity Measurement Ratios: Current Ratio
• Liquidity Measurement Ratios: Quick Ratio
• Liquidity Measurement Ratios: Cash Ratio
• Liquidity Measurement Ratios: Cash Conversion Cycle

Read more: Liquidity Measurement Ratios: Cash Ratio | Investopedia

Comparison

When we compare the liquidity of both companies from table 2.3.1 and table 2.3.2: - Current Ratio: The current ratio of both companies are consider healthy since greater than 1. However we can know from the assets and liabilities and know that the assets and liabilities of NKE is increasing over the years but VFC reduced in assets but increase in liabilities. It might indicate VFC sold some assets to settle the debts and the company size is shrinking. - Quick Ratio: The quick ratio of NKE is greater than 1 but VFC faced liquidity problem in year 2015. - Cash Ratio: The cash ratio of NKE is around 1 indicates it is a healthy company but VFC has insufficient cash to cover liabilities but that is consider a normal phenomena.

2.4 Question 4

  Compute the main balance sheet leverage ratios for both Nike and V.F.Corporation (Debt/(Debt + Equity), and Liabilities/Assets). You only need to do this using the most recently available data so as to reflect the current valuation of the companies.

\[\frac{Debt}{Debt + Market\ Value\ of\ Assets} \cdots equation\ 2.4.1\]
\[\frac{Total\ Liabilities}{Market\ Value\ of\ Assets} \cdots equation\ 2.4.2\]
\[Market\ Value\ of\ Assets = Market\ Value\ of\ Equity + Total\ Liabilities \cdots equation\ 2.4.3\]

table 2.4.1A: Key stats of stock counter NKE.

table 2.4.1B: Main balance sheet of stock counter NKE.

• Market Value of Equity: $95572.06 (Jul-27-2015)
• Market Value of Assets: $104465.06 (Jul-27-2015)

table 2.4.2A: Key stats of stock counter VFC.

table 2.4.2B: Main balance sheet leverage ratios of stock counter VFC.

• Market Value of Equity: $31732.88 (Jul-23-2015)
• Market Value of Assets: $36674.59 (Jul-23-2015)

Understanding Leverage Ratio

While some businesses pride themselves on being debt-free, most companies have had to borrow at one point or another to buy equipment, build new offices or cut payroll checks. For the investor, the challenge is determining whether the organization’s debt level is sustainable.

Is having debt, in and of itself, harmful? Well, yes and no. In some cases, borrowing may actually be a positive sign. Consider a company that wants to build a new plant because of increased demand for its products. It may have to take out a loan or sell bonds to pay for the construction and equipment costs, but it’s expecting future sales to more than make up for any associated borrowing costs. And because interest expenses are tax-deductible, debt can be a cheaper way to increase assets than equity.

The problem is when the use of debt, also known as leveraging, becomes excessive. With interest payments taking a large chunk out of top-line sales, a company will have less cash to fund marketing, research and development and other important investments.

Large debt loads can make businesses particularly vulnerable during an economic downturn. If the corporation struggles to make regular interest payments, investors are likely to lose confidence and bid down the share price. In more extreme cases, bankruptcy becomes a very real possibility.

For these reasons, seasoned investors take a good look at liabilities before purchasing corporate stock or bonds. As a way to quickly size up businesses in this regard, traders have developed a number of ratios that help separate healthy borrowers from those swimming in debt.

Debt and Debt-to-Equity Ratios

Two of the most popular calculations, the debt ratio and debt-to-equity ratio, rely on information readily available on the company’s balance sheet. To determine the debt ratio, simply divide the firm’s total liabilities by its total assets:

\[Debt\ Ratio = Total\ Liabilities / Total\ Assets \cdots equation\ 2.4.4\]

A figure of 0.5 or less is ideal. In other words, no more than half of the company’s assets should be financed by debt. In reality, many investors tolerate significantly higher ratios. Capital-intensive industries like heavy manufacturing depend more on debt than service-based firms, for example, and debt ratios in excess of 0.7 are common.

As its name implies, the debt-to-equity ratio instead compares the company’s debt to its stockholder equity. It’s calculated as follows:

\[Debt-to-equity\ Ratio = Total\ Liabilities / Stockholders'\ Equity \cdots equation\ 2.4.5\]

If you consider the basic accounting equation (Assets – Liabilities = Equity), you may realize that these two equations are really looking at the same thing. In other words, a debt ratio of 0.5 will necessarily mean a debt-to-equity ratio of 1. In both cases, a lower number indicates a company less dependent on borrowing for its operations.

While both these ratios can be useful tools, they’re not without shortcomings. For example, both calculations include short-term liabilities in the numerator. Most investors, however, are more interested in long-term debt. For this reason, some traders will substitute “total liabilities” with “long-term liabilities” when crunching the numbers.

In addition, some liabilities may not even appear on the balance sheet, and thus don’t enter into the ratio. Operating leases, commonly used by retailers, are one example. Generally Accepted Accounting Principles, or GAAP, doesn’t require companies to report these on the balance sheet, but they do show up in the footnotes. Investors who want a more accurate look at debt will want to comb through financial statements for this valuable information.

Interest Coverage Ratio

Perhaps the biggest limitation of the debt and debt-to-equity ratios is that they look at the total amount of borrowing, not the company’s ability to actually service its debt. Some organizations may carry what looks like a significant amount of debt, but they generate enough cash to easily handle interest payments.

Furthermore, not all corporations borrow at the same rate. A company that has never defaulted on its obligations may be able to borrow at a 3 percent interest rate, while its competitor pays a 6 percent rate.

To account for these factors, investors often use the interest coverage ratio. Rather than looking at the sum total of debt, the calculation factors in the actual cost of interest payments in relation to operating income (considered one of the best indicators of long-term profit potential). It’s determined with this straightforward formula:

\[Interest\ Coverage\ Ratio = Operating\ Income / Interest\ Expense \cdots equation\ 2.4.6\]

In this case, higher numbers are seen as favorable. In general, a ratio of 3 and above represents a strong ability to pay off debt, although here, too, the threshold varies from one industry to another.

Read more: Understanding Leverage Ratios | Investopedia

Comparison

When we observe from the table 2.4.1B and table 2.4.2B, we can know the company NKE is growing since assets, liabilities, equity all increase beyond the years but VFC almost fluctuate within a range.

table 2.4.3: Leverage ratios of stock counter NKE and VFC.

We can know from above table where both companies have low leverage ratio.

2.5 Question 5

  Compute the main profitability ratios for both Nike and V.F.Corporation (Asset turnover, profit margin, and ROA). Do this for the last 3 years available.

Kindly refer to Operations Management: Module 1: Operations Strategy Assignment 2 by ®γσ, Eng Lian Hu 201611 refer to reference paper 02 in 4.4 References to know about: - Asset Turnover - Operating Margin - Return of Equity

table 2.5.1A: Key financial statement of NKE.

table 2.5.1B: Key financial statement of VFC.

table 2.5.2A: Profitability ratio of NKE.

table 2.5.2B: Profitability ratio of VFC.

Comparison

By refer to table 2.5.2A and table 2.5.2B:

• Asset turnover: NKE generates more revenue from the its company asset compare to VFC.
• Net Profit Margin: The profit margin of VFC slightly higher than NKE.
• ROA: The return of assets of both companies almost same.
• ROE: The return on equity of both companies almost same.

2.6 Question 6

  Compute the cash profitability ratio for both Nike and V.F.Corporation. Do this for the last 3 years available.

table 2.6.1A: Cash profitability ratio of NKE.

table 2.6.1B: Cash profitability ratio of VFC.

Comparison

From above tables, CFOA of both companies have no big range difference on making profit but latest year 2015 NKE has greater cash profitability ratio.

2.7 Question 7

  Analyze the cash flow statement of both Nike and V.F.Corporation in the last 3 years. Are the companies investing to grow the business? Are they raising cash from investors or are they returning cash to investors?

table 2.7.1A: cash flow statement of NKE.

table 2.7.1B: cash flow statement of VFC.

What is ‘Cash Flow From Operating Activities (CFO)’?

Cash flow from operating activities (CFO) is an accounting item indicating the money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service. Cash flow from operating activities does not include long-term capital or investment costs. It does include earnings before interest and taxes plus depreciation minus taxes.

Also called operating cash flow or net cash from operating activities, it can be calculated as follows:

\[Cash\ Flow\ From\ Operating\ Activities = EBIT + Depreciation - Taxes \cdots equation\ 2.7.1\]

Read more: Cash Flow From Operating Activities Definition | Investopedia

What is ‘Cash Flow From Investing Activities’?

Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company’s cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment.

When analyzing a company’s cash flow statement, it is important to consider each of the various sections which contribute to the overall change in cash position. In many cases, a firm may have negative overall cash flow for a given quarter, but if the company can generate positive cash flow from business operations, the negative overall cash.

Read more: Cash Flow From Investing Activities Definition | Investopedia

What is ‘Cash Flow From Financing Activities’?

A category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock. Cash flow from financing activities shows investors the company’s financial strength. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid.

The formula for cash flow from financing activities is as follows:

\[Cash\ Received\ from\ Issuing\ Stock\ or\ Debt - Cash\ Paid\ as\ Dividends\ and Re-Acquisition\ of\ Debt/Stock \cdots equation\ 2.7.2\]

Read more: Cash Flow from Financing Activities Definition | Investopedia

Comparison

From above tables, we observed that both companies make profit from the cash flow, while NKE had refinanced and repurchased the stock in year 2014.

• Cash from operating activities: positive figure means both companies making money from the business.
• Cash from investing activities: The negative figure might indicate the company buying assets or repurchased the stock. You can refer to table 2.5.1A and table 2.5.1B to know the assets and equity as well. Examples of negative cash flow from investing activities includes the purchase of fixed assets, the purchase of investment instruments such as stocks, and lending money. Examples of positive cash flow from investing includes the sale of fixed assets, the sale of investment instruments, and the collection of loans and insurance proceeds.
• Cash from financing activities: Financing activities that generate negative cash flow include spending cash to repurchase previously issued stock, to pay down debt, to pay interest on debt and to pay dividends to shareholders.

2.8 Question 8

  Compute the main valuation ratios for Nike and V.F.Corporation (Value/OPAT and Market/Book). You only need to do this using the most recently available data so as to reflect the current valuation of the companies.

Market Value Versus Book Value

Understanding the difference between book value and market value is a simple yet fundamentally critical component of any attempt to analyze a company for investment. After all, when you invest in a share of stock or an entire business, you want to know you are paying a sensible price.

Book value literally means the value of the business according to its “books” or financial statements. In this case, book value is calculated from the balance sheet, and it is the difference between a company’s total assets and total liabilities. Note that this is also the term for shareholders’ equity. For example, if Company XYZ has total assets of $100 million and total liabilities of $80 million, the book value of the company is $20 million. In a very broad sense, this means that if the company sold off its assets and paid down its liabilities, the equity value or net worth of the business, would be $20 million.

Market value is the value of a company according to the stock market. Market value is calculated by multiplying a company’s shares outstanding by its current market price. If Company XYZ has 1 million shares outstanding and each share trades for $50, then the company’s market value is $50 million. Market value is most often the number analysts, newspapers and investors refer to when they mention the value of the business.

Implications of Each

Book value simply implies the value of the company on its books, often referred to as accounting value. It’s the accounting value once assets and liabilities have been accounted for by a company’s auditors. Whether book value is an accurate assessment of a company’s value is determined by stock market investors who buy and sell the stock. Market value has a more meaningful implication in the sense that it is the price you have to pay to own a part of the business regardless of what book value is stated.

As you can see from our fictitious example from Company XYZ above, market value and book value differ substantially. In the actual financial markets, you will find that book value and market value differ the vast majority of the time. The difference between market value and book value can depend on various factors such as the company’s industry, the nature of a company’s assets and liabilities, and the company’s specific attributes. There are three basic generalizations about the relationships between book value and market value:

• Book Value Greater Than Market Value: The financial market values the company for less than its stated value or net worth. When this is the case, it’s usually because the market has lost confidence in the ability of the company’s assets to generate future profits and cash flows. In other words, the market doesn’t believe that the company is worth the value on its books. Value investors often like to seek out companies in this category in hopes that the market perception turns out to be incorrect. After all, the market is giving you the opportunity to buy a business for less than its stated net worth.
• Market Value Greater Than Book Value: The market assigns a higher value to the company due to the earnings power of the company’s assets. Nearly all consistently profitable companies will have market values greater than book values.
• Book Value Equals Market Value: The market sees no compelling reason to believe the company’s assets are better or worse than what is stated on the balance sheet.

It’s important to note that on any given day, a company’s market value will fluctuate in relation to book value. The metric that tells this is known as the price-to-book ratio, or the P/B ratio:

\[P/B\ Ratio = Share\ Price/Book\ Value\ Per\ Share \cdots equation\ 2.8.1\]

(where Book Value Per Share equals shareholders’ equity divided by number of shares outstanding)

So one day, a company can have a P/B of 1, meaning that BV and MV are equal. The next day, the market price drops and the P/B ratio is less than 1, meaning market value is less than book value. The following day the market price zooms higher and creates a P/B ratio of greater than 1, meaning market value now exceeds book value. To an investor, whether the P/B ratio is 0.95, 1 or 1.1, the underlying stock trades at book value. In other words, P/B becomes more meaningful the greater the number differs from 1. To a value-seeking investor, a company that trades for a P/B ratio of 0.5 implies that the market value is one-half of the company’s stated book value. In other words, the market is selling you each $1 of net assets (net assets = assets - liabilities) for 50 cents. Everyone likes to buy things on sale, right?

Read more: Market Value Versus Book Value | Investopedia

table 2.8.1: Valuation ratio of company NKE and VFC.

• Market Value ÷ Operating Profits After Taxes: these ratio consider as the investors’ prospective ratio in financial market based on every single dollar net profit. Normally a company make profit consistantly will has a ratio which more than 1. NKE has greater ratio than VFC since we can know NKE is healthier than VFC from the cash flow and other key ratios from income and balance statements.
• Market Value ÷ Book Value: Both companies have a ratio which greater than 1, it means investors in financial market forecast these two companies will keeping make profit. Normally a company make profit consistantly will has a ratio which more than 1. NKE has greater ratio than VFC since we can know NKE is healthier than VFC from the cash flow and other key ratios from income and balance statements.

2.9 Question 9

  Discuss the implications of your results. How do the two companies compare to each other? What have you learned from the comparison of financial ratios for these two companies? (2 paragraphs maximum)

As conclusion to compare with these two companies:

• From table 2.3.1 and table 2.3.2, we can know the current ratio, quick ratio and also cash ratio of NKE are greater than VFC’s. The ratio greater than 1 means that the company can reaction quicky on any unforeseen financial turnover issue and indicate that the company is a healthy company with sufficient cash.
• From table 2.4.1B and table 2.4.2B, we know the company size of NKE is larger than VFC. table 2.4.3 shows both companies have low levarage ratio on debt.
• table 2.5.1A and table 2.5.1B are the income statement of both comapny which showing the business revenue of NKE is greater than VFC. table 2.5.2A and table 2.5.2B are the tables differentiate the profitability ratio of both companies whic are alsmost similar but the Asset-turnover ratio of VFC slighly increase as year goes by.
• Cash profitanility ratios from table 2.6.1A and table 2.6.1B are the cash flow rate from assets. NKE has greater ratio than VFC. Meanwhile, the CFOA of NKE in year 2015 increase from 2014 but oppsite with VFC.
• The cash flow statement in table 2.7.1A and table 2.7.1B show both companies repurchase the stock of own company. Normally when a company think thier business growth is undervalued by the market value will buyback the stock. Sometimes that is due to the company protest from the speculations by hedge fund or hostile takeover by other business group.
• table 2.8.1 shows the market valuation ratio of both companies. The ratio indicates the investors prospective to the company. Investors from financial market evaluated NKE’s from its past and current value and optimistic to its future prospect and growing rate will be better than future value of VFC.

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

• File creation date: 2016-07-10
• File latest updated date: 2016-07-16
• R version 3.3.1 (2016-06-21)
• R version (short form): 3.3.1
• rmarkdown package version: 1.0
• tufte package version: 0.2
• File version: 1.0.0
• Author Profile: ®γσ, Eng Lian Hu
• GitHub: Source Code
• Additional session information:

[1] “2016-07-16 20:38:18 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-16
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

• July 10, 2016: version: 1.0.0

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers.

There are few books stated in 3. Conclusion and below references that I need to read for further understanding.

• Managerial Accounting
• Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009
• Corporate Finance (3rd Edition) by Ivo Welch 2014

4.4 References

1. Corporate Finance (3rd Edition) by Ivo Welch 2014
2. Operations Management: Module 1: Operations Strategy Assignment 2 by ®γσ, Eng Lian Hu 2016

1.1 Overview

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This is a required activity for this module. The activity is peer reviewed, so after you submit your responses, you will review submissions by fellow learners in the course.

1.2 Review criteria

For Assignment #2, you will be responsible for evaluating the submissions of THREE of your peers. Before evaluating, please see the video I prepared with my discussion of the answers to Assignment #2.

Assignment #2 is worth 100 points total. Points are only given for correct/reasonable answers in the manner specified below, incorrect/unreasonable answers get zero points. Points should be allocated as follows:

1.3 Reminders

2.1 Question 1

Question:

You are the CFO of a small manufacturing company, and you just figured out that your company will need to raise 30 million dollars to finance an expansion plan. The company will likely not need the 30 million now, but only in a few years as capital expenditure needs grow. You are considering two options. Option 1 is to wait until the future capital expenditure needs arise to borrow money. The second option is to borrow now, and retain the funds in the balance sheet. Discuss the trade-off that you would need to consider before making this decision (1 paragraph maximum).

Answer:

2.2 Question 2

Question:

Explain why an increase in accounts receivable is a short-term investment in the business. (1 paragraph maximum)

Answer:

• Receivable debt increase the sales for company.
• For example, a sportsbook hedge fund invest (place bets) on a credit market company,(let say Maxbet or Crown etc.) the return from the staking on the credit market can increase the profit. (Normally cash market company set a low staking limit for customers compare to credit market)
• It consider as short-term investment, let say placed GBP100,000 on multiple soccer matches with average odds price 1.25, the return of GBP120,000 is a profitable investment.
• It might consider as an investment for trust, because the credit line might expend the future sales based on the credence.

2.3 Question 3

Question:

You are the CFO of a small retailing business that has strong seasonality in sales. Your business consistently generates negative cash flow in the first two quarters, though cash flow is positive if you consider the year as a whole (sales are strong in the third and fourth quarters). Which options does the CFO have to manage this company’s short term finances ? (2 paragraphs maximum)

Answer:

• Bank loan for 3 quaters (if avaiable, since interest rate paid for annual bank loan will be higher) since the cash flow is positive from 3rd quater.
• Sufficient cash might make the operation running smoothly in first two quarters. (to offset the financial problems like overhead cost and fixed cost etc for first two quarters)

2.4 Question 4-a

Question:

You are the CFO of a medium-sized Agribusiness, and you have negotiated favorable terms to pay for supplies of seeds and equipment. Your suppliers allow you to pay for most these necessary inputs at the end of harvest, after you have sold your main crops. After harvest, your business needs to restock on seeds and equipment for next year’s harvest. As as a result of this business model, your Agribusiness carries a significant amount of accounts payable throughout the year.

Explain why this business model creates liquidity risk for the company. (1 paragraph maximum)

Answer:

• Liquidity risk might be facing since some suppliers might ask for payment before harvested.
• CFO needed to ask for the delay of payment after harvested since the company faced shortage of cash.
• The credit line business might create a win-win situation for suppliers and also the company. Suppliers can get profit the business even though it is not receive immediate but reacivable annually. Meanwhile, the company can operate the business smoothly with sufficient fund to harvest and generates profit upon sales.

2.5 Question 4-b

Question:

You are the CFO of a medium-sized Agribusiness, and you have negotiated favorable terms to pay for supplies of seeds and equipment. Your suppliers allow you to pay for most these necessary inputs at the end of harvest, after you have sold your main crops. After harvest, your business needs to restock on seeds and equipment for next year’s harvest. As a result of this business model, your Agribusiness carries a significant amount of accounts payable throughout the year.

Explain how you can use a bank credit line to help manage the liquidity risk that you identified in part a. (1 paragraph maximum)

Answer:

• As mentioned in 2.4 Question 4-a, since the company faced financial liquidity problem before harvest. Therefore a credit line business/agreement required to offset the liquidity problem since the company harvest once a year and there is a portion of cash might reserved for 12 months expenditure. Insuffient fund to pay for the renwal of equiments and also seeds.
• Credit line not only overcome the short term financial problem but also a long term business co-operation for both parties.

2.6 Question 5-a

Question:

You are the CFO of a company that is considering whether it is worthwhile to speed up the collection of accounts receivable to reduce the cash conversion cycle. This is the current situation in your company

• Expected annual sales = 1 billion
• 80% of these sales are received immediately, 20% after one year

You are considering whether it is worth to demand quicker payment from your costumers. You estimate that you can collect 90% of annual sales immediately if you lower prices by a certain amount. As a result of these discounts, your expected annual sales will decrease by 2%, to 980 million a year.

To solve this question, assume that there are no costs and no taxes. Thus, sales are equal to profits. In addition, there are no existing receivables to collect at the beginning of the first year.

In the current situation (80% collected immediately), what are the cash flows at the beginning and at the end of the first year?

Answer:

table 2.6.1: cash flow stament of company.

From above table, 80% of sales receive the payment immediately after sales but the rest of 20% need to wait until year end but receivables.

2.7 Question 5-b

Question:

You are the CFO of a company that is considering whether it is worthwhile to speed up the collection of accounts receivable to reduce the cash conversion cycle. This is the current situation in your company

• Expected annual sales = 1 billion
• 80% of these sales are received immediately, 20% after one year

You are considering whether it is worth to demand quicker payment from your costumers. You estimate that you can collect 90% of annual sales immediately if you lower prices by a certain amount. As a result of these discounts, your expected annual sales will decrease by 2%, to 980 million a year.

To solve this question, assume that there are no costs and no taxes. Thus, sales are equal to profits. In addition, there are no existing receivables to collect at the beginning of the first year.

If you decide to implement the change (90% collected immediately), what are the cash flows at the beginning and at the end of the first year?

Answer:

table 2.7.1: cash flow stament of company.

From the table, we know the sales is decreased from $1 bil to $980 mil, therefore 90% of sales is $882 mil and the rest of receivables are $98 mil after launching the quiker demand for payment. There might due to some distributors/customers might not be able to pay the money immediately.

• The immediate cash from sales is more than previous $800 mil. The company can use the fund for further investment.
• Although the total sales in annual report will be $980 mil which is less than previous 1 bil, the NPV and the inflation rates might need to take consideration.
• Some companies might prefer higher direct cash from sales since there might use the cash for other investment provided the return of investment (ROI) is greater than ROI of $20 mil.

2.8 Question 5-c

Question:

Now consider what happens in the folllowing year. To do so, assume that sales are expected to remain stable irrespective of which collection system you use. That is, sales are 1,000 a year in the current system and 980 a year in the new system.

At the end of the first year, you will collect receivables that were generated in the beginning of the first year, and make new sales for the second year. Notice that the beginning of the second year coincides with the end of the first year (think December 31 – January 1.)

Compute the cash flows for the second year in the two cases (80% and 90% collection systems).

Answer:

table 2.8.1: cash flow stament of company on 80%-20%.

From the table showing above, we can know the immediate cash from sales is $800 mil, and the breakdown for the Year End will be $200 mil. Therefore the $200 mil will be only showing at the end of year since it is not immediate cash from sales.

table 2.8.2: cash flow stament of company on 90%-10%.

Similar theory applied to table 2.8.1.

2.9 Question 5-d

Question:

What will happen at the end of the second year?

Answer:

table 2.9.1: cash flow stament of company on 80%-20%.

From the table showing above, we can know the immediate cash from sales is $800 mil, and the breakdown for the Year End will be $200 mil. Therefore the $200 mil will be only showing at the end of year since it is not immediate cash from sales. Similar with second year, the immediate cash from sales on second year, the receivables will only showing in year end but not immediate cash from sales.

table 2.9.2: cash flow stament of company on 90%-10%.

Similar theory applied to table 2.9.1.

2.10 Question 5-e

Question:

Now you should be ready to discuss the trade-off that the CFO will face when making the decision to speed up collection or not. What do you gain if you make this decision? What do you lose?

Important note: To make a decision about the collection system we need the concept of Net Present Value (NPV). We will develop this concept in Module 3 and finish this problem after we have learned how to calculate and use NPV.

Answer:

table 2.10.1: cash flow stament of company on 80%-20%.

table 2.10.2: cash flow stament of company on 90%-10%.

Lets compare the table 2.10.1 and table 2.10.2, the cash flow from the ealier table shows low immediate cash flow. Normally a receivables might effect the cash flow statement especially long term receivables. Receivables showing on statement is not immediate cash but succession of getting money back from sales.

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

• File creation date: 2016-07-23
• File latest updated date: 2016-07-24
• R version 3.3.1 (2016-06-21)
• R version (short form): 3.3.1
• rmarkdown package version: 1.0
• tufte package version: 0.2
• File version: 1.0.0
• Author Profile: ®γσ, Eng Lian Hu
• GitHub: Source Code
• Additional session information:

[1] “2016-07-24 00:31:17 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-24
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

• July 23, 2016: version: 1.0.0

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers.

There are few books below that I need to read for further understanding.

• Managerial Accounting
• Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009
• Corporate Finance (3rd Edition) by Ivo Welch 2014

4.4 References

1. Corporate Finance (3rd Edition) by Ivo Welch 2014

1.1 Overview

Instructions

The purpose of this assignment is to give you the opportunity to apply the concepts you have learned in this module and to discuss some of the key ideas of the module in your own words. Follow the instructions provided and respond to each question. This a required activity for this module. The activity is peer reviewed, so after you submit your responses, you will review submissions by fellow learners in the course.

1.2 Review criteria

For Assignment #3, you will be responsible for evaluating the submissions of THREE of your peers. Before evaluating, please see the video I prepared with my discussion of the answers to Assignment #3.

Assignment #3 is worth 100 points total. Points are only given for correct/reasonable answers in the manner specified below, incorrect/unreasonable answers get zero points. Points should be allocated as follows:

Question 1

• 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures
• 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph)

Question 2

• 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
• 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph).

Question 3

• 10 points for figuring out what is the NPV.
• 5 points for an incomplete answer.

Question 4

• 10 points a reasonable answer that is based on the arguments that we discussed in the lectures.
• 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph).

Question 5

• 10 points for the correct cash flows.
• 5 points for an answer that is partially correct.

Question 6

• 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
• 5 points for an incomplete answer.

Question 7

• 20 points for a complete answer that is correct. To get 20 points the student should set up the decision tree correctly, and calculate the correct NPV.
• 15 points for a good answer that has calculation mistakes. For example if the student sets up the right decision tree but makes a calculation mistake to get the NPV.
• 10 points for an incomplete answer.

Question 8

• 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
• 5 points for an incomplete answer.

Question 9

• 10 points for a reasonable answer that is based on the arguments that we discussed in the lectures.
• 5 points for an incomplete answer or a correct answer that is too long (longer than 1 paragraph).

Recommendations for Fair Peer Review:

For questions that require calculations only, the score should be based on whether or not the answer provided is correct.

For subjective questions, the score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.

Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.

A clear and concise answer is preferable to a long response that lacks coherence. Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Instructions

There are multiple steps to this assignment.

First, you will submit your answers to each of the questions based on the information in the Assignment Details section. Enter your answers directly in the spaces provided in the My submission tab. You may save a draft of your work as you go, and you can come back later to continue working on your draft. When you are finished working, click the Preview button, verify your identity, and then Submit the assignment. Please answer each question fully and concisely.

Then, you will evaluate the submissions of at least THREE of your peers based on the instructions provided. You may begin giving feedback to other students as soon as you submit your assignment, click the Review peers tab to begin. Feel free to provide additional reviews beyond the three required!

Assignment 3 is described in Video Lesson 3-13, you should watch this video before doing the assignment.

The discussion of the assignment solution is provided in Video Lesson 3-14. Do the assignment on your own first, before viewing the assignment discussion video! Please view the assignment discussion video before completing the review of your peers.

1.4 Reminders

Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the Module 1 Forum and receive feedback before submitting this assignment. Additionally, make sure to pay attention to posts from the instructors, which are intended to spur conversation on topics related to the week’s theme.

Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2.1 Question 1

Question:

Explain why is it that a company that takes all projects that have positive NPV will end up maximizing shareholder value. Why is market efficiency an important condition behind the equivalence of NPV and shareholder value maximization ? (1 paragraph)

Answer:

  - NPV is a measurement on the return of the investment on a project.
  - Normally, the stocks price of the business group will increse once a company announced acquisation of a profitable (positive NPV) project.
  - Basically it is consider as efficient market since the postive valued project will cause increasing of stocks price.

table 2.1.1: Example of NPV of project A and project B of a company.

Kindly refer to 2.1.3 Net present value inside Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 2 Mini-Project11 Please refer to Alternative link if primary link is corrupted for a case study on return of investment on two options.

What is ‘Net Present Value - NPV’?

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project.

The following is the formula for calculating NPV:

\(NPV = \sum_{t=1}^{T}\frac{C_{t}}{(1+r)^t}-C_{o}\)

Net Present Value (NPV)

where

\(C_{t} = net\ cash\ inflow\ during\ the\ period\ t\)

\(C_{o} = total\ initial\ investment\ costs\)

\(r = discount\ rate,\ and\)

\(t = number\ of\ time\ periods\)

A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

When the investment in question is an acquisition or a merger, one might also use the Discounted Cash Flow (DCF) metric.

Apart from the formula itself, net present value can often be calculated using tables, spreadsheets such as Microsoft Excel or Investopedia’s own NPV calculator.

Read more: Net Present Value (NPV) Definition | Investopedia

2.2 Question 2

Question:

Does the NPV rule (take all positive NPV projects) guarantees that a company will make socially responsible investments ? You may need to recap lecture 1 to answer this question. (1 paragraph)

Answer:

  - For some business, NPV assures shareholder value maximization but will generate conflicts between stakeholders and social resposibility.
  - For example: gambling, tobacco, heroin, opium, wine and brothel business will generate social issues but it will generate profit to company.

2.3 Question 3

Question:

What is the present value of a growing perpetuity that generates a cash flow of 35 next year and grows at a rate of 7% a year forever, if the discount rate is 5% a year? (Hint : it is not a negative number !)

Answer:

  - 35 ÷ (5% - 7%) = -1,750
  - In theory, if the growth rate is higher than the discount rate, the growing perpetuity would have an infinite value.

The present value of a growing perpetuity formula is the cash flow after the first period divided by the difference between the discount rate and the growth rate.

A growing perpetuity is a series of periodic payments that grow at a proportionate rate and are received for an infinite amount of time. An example of when the present value of a growing perpetuity formula may be used is commercial real estate. The rental cash flows could be considered indefinite and will grow over time.

It is important to note that the discount rate must be higher than the growth rate when using the present value of a growing perpetuity formula. This is due to the present value of a growing perpetuity formula being an infinite geometric series as explained in one of the following sections. In theory, if the growth rate is higher than the discount rate, the growing perpetuity would have an infinite value.

Kindly refer to Present Value of Growing Perpetuity for more information.

2.4 Question 4

Question:

Explain why the IRR rule (take projects with IRR greater than the discount rate) is equivalent to the NPV rule (take projects with positive NPV). What are the conditions that you need to check to make sure that you can compute IRR ? (1 paragraph)

Answer:

We can know from table 2.1.1 where :

• IRR of Option.A = 27.81%
• IRR of Option.B = 9.09%

A positive in row Difference: A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

Read more: Net Present Value (NPV) Definition | Investopedia

Kindly refer to 2.1.3 Net present value inside Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 2 Mini-Project22 Please refer to Alternative link if primary link is corrupted for a case study on return of investment on two options.

2.5 Question 5

Question:

Leather Goods Inc. wants to expand its product line into wallets. The required initial outlay is $700,000. They expect to sell 150,000 units per year, and their planning horizon is 5 years. The price of wallets is estimated to be equal to $12 for the entire period, and the costs of production are $9 per unit for the entire period. However, the company expects the wallet project to erode $200,000 of the yearly sales of the existing products of the company. In addition, they estimate that competitors, who produce similar wallets, will erode $100,000 of the firm’s current sales if the wallet project does not go through. If the wallet project does go through, erosion from competitors is going to be equal to 50,000. Assume no salvage value (the project is worth zero after the end of 5 years), no taxes, no working capital and straight line depreciation. Draw a time line with the relevant cash flows for the wallet project. There is no need to compute IRR or NPV.

Answer:

table 2.5.1: NPV of Leather Goods Inc.

• 150,000 units x ($12 - $9) = $450,000 per year

table 2.5.2: Summary of Leather Goods Inc.’s projects

• Wallet project reduces erosion from competitors.
• Old - New has incremental cash flow $300,000.

table 2.5.3: Summary of Leather Goods Inc.’s new cash flow statement.

2.6 Question 6

Question:

You are considering whether to enroll in a full time MBA at an annual after-tax cost of 200,000 including tuition and all living expenses. The program lasts two years. You estimated that after the program ends, you will be able to increase your lifetime, after-tax earnings by 700,000. Is the MBA a positive NPV investment for you?

Answer:

  - Total Cost : $200,000 x 2 years = $400,000
  - Life-time Earnings = $700,000
  - NPV : $700,000 - $400,000 = $300,000 (since the student might pursuite for MBA degree after Bachelor degree)
  - Due to question doesn't mention the person is an employee or student. Might be there is a student or an employee? Here I rejected the answer from Lecturer Heitor Almeida.

2.7 Question 7

Question:

You work for a pharmaceutical company that is developing a new drug to reduce cholesterol. Based on current information, the drug’s NPV is estimated to be 200 million dollars. You are trying to decide whether it is worth undertaking additional research before launching the drug. Specifically, you want to find out whether the drug can also be sold to pregnant women. Right now the drug is not approved to be used for that group. This R&D will cost 10 million dollars, and will last for one year. If the research turns out to be positive, you can increase the drug’s NPV to 250 million (in one year). But if the research turns out negative results you have to go back to the original plan. In that case the NPV of the drug is still 200 million (next year). The probability of success is 30%, and the discount rate is 10%. Should you launch the drug today, or should you do additional research and wait until next year?

Answer:

  - Trade-off
  - Waiting will cost 10M (R&D cost) and reduce the NPV if the research is not sucessful.
  - The NPV will be increased from 200M to 250M if the research is sucessful.

figure 2.7.1: diagram of investment and NPV of the project.

• Launch the drugs today : NPV = 200
• Launch the drugs tomorrow : \(NPV = -10 + (30\% x 250 + 70\% x 200)/(1 + 10\%)\) = 185.4545455

2.8 Question 8

Question:

Consider the gold mine problem we discussed in the lecture notes. Your task is to show that if the cost of closing the gold mine is zero (we called this cost the “decomissioning cost”), then it will never make sense to wait a year to get more information about gold prices. There is no need to do math, a logical argument should suffice. But you can do math if you would like to.

Answer:

figure 2.8.1: diagram of profit and loss upon closing the gold mining business now.

figure 2.8.2: diagram of profit and loss upon closing the gold mining business next year.

• If the cost of closing the mine is zero, then you would never wait.
• The main benefit of waiting is zero loss if the gold price goes down.
• Since the question doesn’t mention cost of setup gold mining business. Therefore we unable say close with zero loss and reopen is a good option.

2.9 Question 9

Question:

Explain why the option to wait is more valuable when investments are irreversible. (1 paragraph)

Answer:

• Irreversible investment is very risky. Once the fund is invested, it can not be get the payback until completed the project.
• Therefore for the irreversible investment, better waiting and observe and evaluate prior to inject the fund into the pool.

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

• File creation date: 2016-07-23
• File latest updated date: 2016-07-31
• R version 3.3.1 (2016-06-21)
• R version (short form): 3.3.1
• rmarkdown package version: 1.0
• tufte package version: 0.2
• File version: 1.0.0
• Author Profile: ®γσ, Eng Lian Hu
• GitHub: Source Code
• Additional session information:

[1] “2016-07-31 01:01:42 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-31
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

• July 23, 2016: version: 1.0.0

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers.

There are few books below that I need to read for further understanding.

• Managerial Accounting
• Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009
• Corporate Finance (3rd Edition) by Ivo Welch 2014

4.4 References

1. Corporate Finance (3rd Edition) by Ivo Welch 2014
2. Financial Evaluation and Strategy: Corporate Finance : Module 2, Alternative link
3. Managerial Accounting: Tools for Facilitating and Guiding Business Decisions : Module 2 Mini-Project, Alternative link

1.1 Instructions

1.2 Review criteria

You will give a quantitative assessment of all parts of the submission. Then, you will provide qualitative feedback for the submission as a whole.

The following represents a guide for the quantitative assessments of Parts 1-4:

• 0 points: No answer, completely irrelevant answer, inadequate material, and/or evidence does not fit the argument.
• 5 points: Insufficient answer, incomplete, lacks supporting evidence. An insufficient response is incomplete or incorrect. For calculations, the response fails to provide supporting calculations/steps.
• 7 points: Passing, meets expectations. A passing response addresses/answers the question, but some of the answer is not thoroughly explained. For calculations, the supporting calculations/steps are not clear.
• 9 points: Well above average, exceeds expectations An above average response addresses/answers the entire question and most of the answer is thoroughly explained. For calculations, most of the supporting calculations/steps are clear, but there are some minor deficiencies.
• 10 points: Superior performance, excellent. An excellent response answers the entire question, and thoroughly explains the answer. For calculations, all supporting calculations/steps are clearly presented.

Recommendations for Fair Peer Review:

• The score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.
• Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
• A clear and concise answer is preferable to a long response that lacks coherence.
• Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Reminders

Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the forums and receive feedback before submitting your assignment.

Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

Summary

In order to conduct the assignment, I try to using sportsbook industry business as my assignment. Football Form Labs, Star Lizard, SmartOdds11 You can refer to Reference 03 and reference 04 to know the background of the sportsbook consultancy firms as well as the founders. are famous sportsbook consultancy firms in sportsbook industry. I try to put myself into stand point of view as a StarLizarder since I used to used work in Telebiz which is a backend sportsbookmaker while taking bets from high rollers and Star Lizard is the one of crucial client.

However there has no financial report since there are private company. Here I try to take a public listed company which is GVC22 You can refer to Annual & Interim Reports (including Sportingbet and bwin.party) for more details. as an observation for the assignment. The company has made some successful acquisation and takeover activities since decade.

graph 2.1.1 : Acquisition history of GVC group

Health of bwin Party before Acquisition

By refer to Operations Management - Module 1: Operations Strategy by ®γσ, Eng Lian Hu 201633 Refer to Reference 06, we know the : - Asset Turnover Ratio - Operating Margin - Return On Equity (ROE)

Now we try to evaluate if the acquisition is worth or value buy (short term analysis, but acquisition is a long term business decision)? Due to the acquisition has just made less than one year therefore we have inssuficient data and information for analyse. Here I try to refer to quarterly report as short term analysis.

Firstly, we review the annual financial statement of bwin.party digital entertainment from year 2010 to year 2014.

table 2.1.1 : Annual financial statement of bwin Party from year 2010 to 2014.

By refer to above table, we try to evaluate the company’s health.

Asset Turnover Ratio

Table 2.1.2: Asset Turnover Ratio (Year 2010 - 2014)

Assets (€m)	2014	2013	2012	2011	2010
Turnover	611.9	652.4	801.6	691.1	357.3
Net Assets	565.0	677.6	668.9	793.5	233.0
Asset Turnover Ratio	108.3%	96.28%	119.84%	87.1%	153.35%

table 2.1.2 : Asset turnover ratio of bwin Party from year 2010 to 2014.

Operating Margin

Table 2.1.3: Operating Margin (Year 2010 - 2014)

Assets (€m)	2014	2013	2012	2011	2010
Turnover	611.9	652.4	801.6	691.1	357.3
Operating Profit	(97.9)	51.9	(16.5)	(419.7)	46.3
Operating Margin	-16%	7.96%	-2.06%	-60.73%	12.96%

table 2.1.3 : Operating margin of bwin Party from year 2010 to 2014.

Return On Equity (ROE)

Table 2.1.4: Return On Equity (Year 2010 - 2014)

Assets (€m)	2014	2013	2012	2011	2010
Total Equity	565.00	677.60	668.90	793.50	233.00
Operating Profit	(97.9)	51.9	(16.5)	(419.7)	46.3
Return On Equity (ROE)	-17.33%	7.66%	-2.47%	-52.89%	19.87%

table 2.1.4 : Return on equity of bwin Party from year 2010 to 2014.

Summary

Table 2.1.5: Financial Analysis (Year 2010 - 2014)

Assets (€m)	2014	2013	2012	2011	2010
Asset Turnover Ratio	108.3%	96.28%	119.84%	87.1%	153.35%
Operating Margin	-16%	7.96%	-2.06%	-60.73%	12.96%
Return On Equity (ROE)	-17.33%	7.66%	-2.47%	-52.89%	19.87%

table 2.1.5 : Financial analysis of bwin Party from year 2010 to 2014.

From the table above, we observed that the asset turnover ratio fluctuates after 2010. Besides, the operating margin represents the cost management is not efficient. After that, the ROE ratio similar with asset turnover ratio which is not stable. We can know there might be some unexpected issues to cause the stability of growth of the business of bwin Party is bad. However the GVc dicided to takeover and reported generates profit within last quarter in year 2015 prior to acquisition44 Kindly read the article bwin.party reports revenue growth in fourth quarter and Bwin.Party has good fourth quarter before GVC takeover. Let’s look at the financial report of year 2015 in order to know more details as in Report of the Chief Executive.

We observed that the Sports wager has been increased 15% from EUR1.5 billion to EUR1.7 billion from 2014 to 2015 and the Net Gaming Revenue incaresed 10% from 225 million to 248 million. However the operating profit decreased 35% which was from EUR42.9 million to EUR27.7 million. The CEO has declared the one among the challenges for 2016 is the re-energize the bwin Party into the GVC group to drive cost synergies and revenue opportunities.

Above 1st table shows the revenue of bwin Party is EUR562.1 million compare to GVC group’s EUR247.7 million which is more than double. The sports margin gain around 9% from wagers. We can know the business size of bwin Party is greater than GVC. 2nd and 3rd tables display the average wager per day in 1st quarter of 2016 and 2015. The average stakes per day increase 180% compare to year 2015. You can refer to Preliminary Results for year ended 31 December 2015 - 2016 Trading Update for more details.

Part 1

For each of the two decisions you choose:

Describe a specific setting, the decision, decision alternatives, and any other information that would comprise an interesting and challenging problem.

1 Make or buy decisions

Based on above section, we know that the Net Gaming Revenue increases but there has no profit declared, secondly there has just only an quarter after acquisition, therefore we unable to conclude that the acquisition is worth in short term. Below information is required in order to determine if the acquisition is worth or not: - The breakdown financial statement between GVC and bwin Party in order to differentiate the ROI on GVC. GVC can dicide either expand its existing Sportingbet or takeover bwin Party. - The interim report doesn’t content financial statement in cost and also profit breakdown. - Besides, we can refer to page 9 inside Preliminary Results for year ended 31 December 2014, Trading Update for period from 1 January 2015 to 18 March 2015 which summarise the cash flow on acquisition activities. The cash flow and liabilities of the company need to be considered prior to conduct an acquisition decision.

2016 Trading Update

• Q1-2016 Total Group NGR at EUR167.7 million, up 180% (Q1-2015: EUR60.0 million) following the acquisition of bwin.party on 1 February 2016.
• Q1-2016, like-for-like, constant currency basis, average NGR per day, up 9%
• Year to 20 April 2016, like-for-like, constant currency basis, average NGR per day increases were:
  • Group: +13%
  • GVC brands: +18%
  • Bwin.party brands: +11%
• PartyPoker shows first year on year quarterly growth for five years
• On track to secure €125 million of synergies by the end of 2017 from enlarged GVC

Financial position

• Gross cash position as at 17 April EUR327 million
• Group net debt*** as at 17 April EUR193 million

Although the 2016 interim reports do not state the breakdown, however you can try to refer to year 2015.

You can refer to AGM trading update and Q1 2015 key performance indicators and Unaudited results for the six months ended 30 June 2015 for more details.

2 Keep or drop a product line, business unit, department, etc.

Let us look at the key financial statement above regarding bwin Party 2013, 2014 and 2015 to know the income generates from online gaming and sportsbook. The revenue generates from online gaming is greater than sportsbook while both increasing beyond the year.

However below article descript which sportsbook increase but the other online games declined in revenue.

  Sport betting revenue increase by 1% although Casino & games, poker and bingo revenues declined, with poker revenues taking a massive 29% hit. Pulling out of Greece and “challenging conditions in several markets” were blamed for poker’s poor performance...

You can refer to Bwin.party digital entertainment plc Posts €97.9 Million Loss for more details.

Well, now we try to summarise if both online gaming and sportsbook business should be kept or dropped? Then the question come again due to insufficient information about independent cost and profit listing on both. Secondly, above financial statement states an exceptional item element which cost to company. We unable to know the profit generates seperately from both. Therefore I try to conclude that based on the limited information, both business should keep operating in year 2014 and then we try to compare to the revenue of year 2015.

Part 2

For each of the two decisions you choose:

Create a “deliverable” list for the person who would be completing the problem. This deliverable list should be comprised of (at least) two calculations and (at least) one qualitative discussion deliverable (i.e., requiring explanation, additional considerations, etc).

1 Make or buy decisions

When we talk about the calculation, there has insufficient information about the cost and profit breakdown for both individual sportsbook and online gaming departments. Here we can try to refer to Summary section in 2.1 (before section Part 1) for bwin Party business before acquisition. Then Part 1 eleborate the insifficient information to judge.

However we can refer to below video which has eleborate there must be profitable in order to make an acquisition. - The profit generates must be able to growth and more than the cost of acquisition. - There might probably resizing employees upon acquisition to cut cost. For example traders, customer service and also financial department might united to handle both Sportingbet and bwin Party.55 I am the one among the traders used to monitor few brands when I worked in Telebiz and Caspo. For example: SB1888 and 188Bet or Singbet1 and Singbet3, AS3388 and RCM - Sharing technology like platform, service and tools. Some products or technology might be fully utilised accross two brands.

For example :

Table 2.3.1: Comparison of the Benefit of Merging

Category	ComA	ComB	Combine	Merge	Diff
Customers	1200000	600000	1800000	2000000	-200000
Website & Server	100000	80000	180000	200000	-20000
Cost to Acquire a New Customer	200	400	600	200	400
Labor Cost	575000	33000	608000	585000	23000
Admin Cost	500000	50000	550000	510000	40000
Overhead	260000	23000	283000	265000	18000

table 2.3.1 : Example of merging.

From above table, we can know the basic cost of Company A and Comapny B, and Combined Figure is the lump sum figure of both company, Merged Company is the cost after merging, Difference is the cost save/waste upon takeover. After merge, there will not only lump sum the number of customer for the business group but also allowed customers to register account at another partner website.

Besides, the advertisement cost will be save since both sister-companies can promote to each other. The cost of acquire a new customer keep $200 after takeover which has saved cost. The labor cost and overhead can be saved due to resizing employees and daily expense or rental can be saved upon work in same office or branches. The server might probably upgrade upon invest some fund for long term use, but the data of customers and also stakes might link which easier to handle by employees (example: traders, customer service executives etc.).

• Customers number = additional 200000 upon takeover (since the customers from company website A might also auto awarded an account at company website B, geographical customers might enjoy different website which under same business group. For example: Sportingbet is a British company but bwin is an Austrian company but both under GVC. Let say British customers who familiar with bwin website will able to choose bwin but not only existing Sportingbet website. Some customers who are soccer fans always watching soccer matches will know bwin from advertisement of Real Madrid famous club etc. can also get an account of Sportingbet.)
• Website & server cost = additional 20000 (but linked the database of customers migh easier for GVC group. Especially similar with Macrogaming, easily handle anti-fraud and arbitrage activities among both websites.)
• Saved cost of acquire a new customer = 400 (saved cost. For example customers of Sportingbet will automatically awarded an account on bwin and verce vice.)
• Saved labor cost = 23000
• Saved admin cost = 40000
• Saved overhead cost = 18000

2 Keep or drop a product line, business unit, department, etc.

Similar with previous topic which is insufficient information to proof if casino & games, sportsbook, poker, bingo making profit and cost listing independently. An organization might decide to close a department which was not profitable.

For example :

Table 2.3.2: Department Breakdown of Company C

Category	Sportsbook	Casino & Gaming	Poker	Horse Racing
Revenue	800000	300000	100000	250000
Variable Cost	520000	210000	90000	190000
Fixed Cost	80000	50000	30000	40000
Operating Profit	200000	40000	-20000	20000

table 2.3.2 : Example of division breakdown of company C.

• Total profit = 2.410^{5}
• Total revenue loss = -100000
• Saved Variable Cost = 90000
• Saved Variable Cost = 30000
• Total Saved Cost = 2.610^{5}

Part 3

For each of the two decisions you choose:

In general, ensure that your exercise tests the person’s knowledge related to the use of relevant information in decision making. That is, your exercise should contain some relevant and some “irrelevant” information, so that the person must distinguish between the two types of information. Further, your exercise should allow the person to demonstrate their understanding related to at least two of the following items:

• Opportunity costs
• Sunk costs
• Allocated fixed costs
• Fixed-cost per unit information

1 Make or buy decisions

• Opportunity costs
  • The decision of acquisition bwin Party is an opportunity cost before they invest the fund for takeover the company since they can acquire other companies or use the fund to expand existing Sportingbet’s business.
• Sunk costs
  • When GVC decide to takeover Sportingbet and signed the agreement. All the payment will became sunk costs if GVC want to terminate the agreement with penalty fees. You can read the article GVC Hldgs Takeover Rumours (GVC) to know the stock price blooming 2 times from February. There is another article Online betting company Bwin accepts GVC takeover bid but there is another decision Accept a special order or Sell or process further which is decided by Sportingbet.

2 Keep or drop a product line, business unit, department, etc.

• Opportunity costs
  • The choice of either keep operates or close the department which made loss constantly.
  • We can know from table 2.3.2 which is Poker game (product) made loss, however we need to observe if it is made loss constantly accross few quarter, the cost management factor as well as if it is due to product quality or unprofessional/unskillful of anti-faud team. (For example: I temporarily closed my server to save cost as I have quite some short term debt which need to be settle within 1 year. Meanwhile the studying fees is an opprtunity for me as well which is option to me for self improve.)
• Sunk costs
  • If the company C decide to close Poker business, then the cost spent will became sunk costs. (For example: when we purchased a movie ticket but we didn’t attend to watch the movie, then the cost will became sunk cost since the ticket is not refundable.)
  • If the Poker product is constantly make profit accross the years but only made loss in specific quarter, then it will be another issue while accounting department need to breakdown all revenue and costs spent throughly.

Part 4

Finally, provide a solution for your exercise.

From the case study for GVC and bwin Party. The income statement after acquisition shows a negative operating profit figure where the CEO’s report declared that the cost synergy is one of crucial action need to implement. From the history statement which is from 2010 to 2014, bwin Party is keeping making loss on opearing profit before sell to GVC, and now made loss after acquisition but the revenue is keeping increase every year. Therefore we can concludes that the problem is with the cost management as declared in CEO’s report as well.

With regards to Part 3, I simply made an example of company with a ramdom figure to eleborate about the profitable/unprofitable business and decision making.

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

• File creation date: 2016-07-02
• File latest updated date: 2016-07-07
• R version 3.3.1 (2016-06-21)
• R version (short form): 3.3.1
• rmarkdown package version: 0.9.6
• tufte package version: 0.2
• File version: 1.0.0
• Author Profile: ®γσ, Eng Lian Hu
• GitHub: Source Code
• Additional session information:

[1] “2016-07-07 15:40:15 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-07
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

• July 02, 2016: version: 1.0.0

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers. There are few books that I need to read for further understanding. - Managerial Accounting - Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009

The biggest driver of sales growth was Bwin's sports betting and casino operations. That will reassure GVC investors because the company plans to move its sports punters onto Bwin’s betting platform following the acquisition, which is officially due to complete on February 1...

I can access Sporting.com yesterday on 06-Jul-2016 but not today. Believed that is because of wizards. You can refer to Bwin returns to growth as GVC takeover nears completion for more details.

4.4 References

1. HFR Industry Reports
2. The Evolving Dynamics of the Hedge Fund Industry 2015 Global Hedge Fund and Investor Survey
3. Mugs and Millionaires: Inside the Murky World of Professional Football Gambling by Ed Hawkins 2014
4. Inside Starlizard: The story of Britain’s most successful gambler and the secretive company that helps him win by Oscar Williams Grut 2016
5. Annual & Interim Reports (including Sportingbet and bwin.party)
6. Operations Management - Module 1: Operations Strategy by ®γσ, Eng Lian Hu 2016 Assignment 2, Alternative link

1.1 Instructions

1.2 Review criteria

You will give a quantitative assessment of all parts of the submission. Then, you will provide qualitative feedback for the submission as a whole.

The following represents a guide for the quantitative assessment of Part 1-3:

• 0 points: No answer, completely irrelevant answer, inadequate material, and/or evidence does not fit the argument.
• 5 points: Insufficient answer, incomplete, lacks supporting evidence. An insufficientresponse is incomplete or incorrect. For calculations, the response fails to provide supporting calculations/steps.
• 7 points: Passing, meets expectations. A passing response addresses/answers the question, but some of the answer is not thoroughly explained. For calculations, the supporting calculations/steps are not clear.
• 9 points: Well above average, exceeds expectations. An above average response addresses/answers the entire question and most of the answer is thoroughly explained. For calculations, most of the supporting calculations/steps are clear, but there are some minor deficiencies.
• 10 points: Superior performance, excellent. An excellent response answers the entire question, and thoroughly explains the answer. For calculations, all supporting calculations/steps are clearly presented.

Recommendations for Fair Peer Review:

• The score should not be based on whether or not you agree with the answer, rather on whether the answer is complete and well-supported.
• Both content and organization are important components of a response. Good writing is confident and clearly focused with relevant details to enrich the content. Good writing also follows instructions, such as word limits, and offers requested information.
• A clear and concise answer is preferable to a long response that lacks coherence.
• Focus should be on content; try not to unduly penalize responses for spelling or grammar.

1.3 Reminders

Using the Forums

Your fellow students are a great resource, and we encourage you to sharpen your ideas against them in the forums. You can post your arguments in the forums and receive feedback before submitting your assignment.

Honor Code

Please remember that you have agreed to the Honor Code, and your submission should be entirely yours. Our definition of plagiarism follows from standard literature: passing off someone else’s work as your own, whether from your peers or Wikipedia. If you need to quote material, remember to cite your source, for example: “But, as expressed by Spinoza, all things excellent are as difficult as they are rare (Baruch Spinoza,”Ethica" source: thinkexist.com)."

2.1 Part 1

Cut Here, Inc. is considering a new video rendering system for their in-house studio. Currently, there are two options. Each option involves a significant investment in an asset that has a multi-year useful life. The key benefits of each option are cash savings, which Cut Here equates to cash inflows (i.e., compared to the status quo scenario, in which it incurs significant costs in terms of labor, time, etc.).

Use the cash flow information provided in the Assignment Details section of the Instructions tab.

Then, use the following measures to assess the two options from a financial perspective. That is, compute the following measures for each option.

• Payback
• Accounting rate of return
• Net present value
• Internal rate of return

2.2 Part 2

Based on what you calculated in Part 1, which option would you recommend to Cut Here management?

• Payback for project A is 3.29 Years and 5.57 years for project B. Means that the cost invested on project A will be even on 3.29 years and begin make money after that.
• Accounting Rate of Return for project A is 23.33% and project B is 11.13%. Since the average return for project A across 6 years around 23.33% and it is better than project B.
• NPV for project A is favor and profitable investment, but for project B is not a profitable investment since a big portion of return will be cash in in the 6th years.
• IRR for project A is higher than project B, therefore it is more preferable to investors. The higher the IRR on a project and the greater the amount by which it exceeds the cost of capital, the higher the net cash flows to the investor.33 You can refer to 2.1.4 Internal Rate of Return for more details.

A health cashflow need to be smoothly and project A can make it, while the project B will faced cash flow problem and might looking for loan from bank before 6th year (if that is an opprtunity cost for company which is the company has no extra cash).

From the project A, we can conclude that it is profitable from a short term period. The project B might probably a very huge project, for example a telecomunication company might invest a huge fund but there will be a profitable project for long term. Who knows year 7 will generates millions return? For example, George Soros and a lot of hedge fund will using few years time to observe and make an unexpected high return during financial crisis once.

As a businessman, project A will be faster to make profit, and will not face a tigh cashflow problem compare to project B, and it is worth to invest unless the businessman has sufficient fund for cashflow before year 6, then it will be different story.

2.3 Part 3

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

• File creation date: 2016-07-08
• File latest updated date: 2016-07-29
• R version 3.3.1 (2016-06-21)
• R version (short form): 3.3.1
• rmarkdown package version: 1.0
• tufte package version: 0.2
• File version: 1.0.0
• Author Profile: ®γσ, Eng Lian Hu
• GitHub: Source Code
• Additional session information:

[1] “2016-07-29 00:45:53 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-29
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

• July 08, 2016: version: 1.0.0

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers. There are few books that I need to read for further understanding. - Managerial Accounting - Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009

4.4 References

1. NA

1.1 Instructions

2.1 Part 1: Cost Variances

Question:

Using the information provided in the Assignment Details section of the Instructions tab, respond to the following:

1. For both direct material and direct labor costs, calculate the spending, efficiency, and activity variances. Please provide supporting calculations, label your variances by name, and designate them as favorable or unfavorable. Note: If the given information is insufficient for answering any part of the above question, please denote that clearly, and identify the piece of information you are missing.

2. Provide a brief statement demonstrating your knowledge of the difference between a favorable and an unfavorable variance.

3. Provide at least two potential explanations for each of the variances (i.e., six) that you calculate. If you were to investigate these variances, who would you speak to in order to collect information relevant to your investigation?

Answer:

2.2 Part 2: Revenue Variances

Question:

Using the information provided in the Assignment Details section of the Instructions tab, respond to the following:

1. Calculate the revenue variances (sales price, sales mix, and sales activity) for both the Standard and Super models. Please provide supporting calculations, label your variances by name, and designate them as favorable or unfavorable. Note: If the given information is insufficient for answering any part of the above question, please denote that clearly, and identify the piece of information you are missing.

2. Provide at least two potential explanations for each of the variances (i.e., six) that you calculate. If you were to investigate these variances, who would you speak to in order to collect information relevant to your investigation?

Answer:

4.1 Documenting File Creation

It’s useful to record some information about how your file was created.

• File creation date: 2016-07-23
• File latest updated date: 2016-07-27
• R version 3.3.1 (2016-06-21)
• R version (short form): 3.3.1
• rmarkdown package version: 1.0
• tufte package version: 0.2
• File version: 1.0.0
• Author Profile: ®γσ, Eng Lian Hu
• GitHub: Source Code
• Additional session information:

[1] “2016-07-27 02:12:37 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-07-27
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

4.2 Versions’ Log

• July 08, 2016: version: 1.0.0

4.3 Speech and Blooper

I do appreciate that University of Illinois at Urbana–Champaign provides the Improving Business Finances and Operations specialization via Coursera. I used to study Certified Accounting Technician (CAT) course at PAAC more more decade. Now I need to review the finance and accounting course prior to conduct my research Analyse the Finance and Stocks Price of Bookmakers. There are few books that I need to read for further understanding. - Managerial Accounting - Financial Statement A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson 2009

4.4 References

1. NA

1.1 Introducing Betting Strategies

As a player, we know gambling is that an activities which bet against bankers. Normally gamblers applied few betting strategies to make money from bankers or may be other players. You can try to refer to 数据科学中的R和Python - Data Science is the art of turning data into actions - 如何用21点来击败赌场？or Betting Strategy for more information.

Well, I’ll introducing some sports betting strategies used by a company Sports Insights (You can just read as your own reference, since I’ve never subscribe thier service, here I term it as SI) might help you improve your winning percentage and start making money investing in sports. The following concepts represent some of the most lucrative historical betting trends and are the same tools used by sharp bettors to turn consistent profits.

• Sports Betting Strategy 1 - Betting Against the Public

Betting Against the Public is one of the most popular and simplest methods used by SI to maximize value in the sports betting marketplace.

• Sports Betting Strategy 2 - Reverse-Line Movement

SI will show how analyzing betting trends data and line movement can help you identify which games the sharp money (wagers placed by sharps, wiseguys or betting syndicates) is taking.

• Sports Betting Strategy 3 - Major Line Moves

SI’s major line move analysis explains how to interpret line moves across the sports betting marketplace in order to find value.

• Sports Betting Strategy 4 - Shading Sports Betting Lines

This article explains how sportsbooks shade their lines to exploit human tendencies and how you can take advantage by using SI’s Betting Against the Public strategy.

• Sports Betting Strategy 5 - Shopping for the Best Line

Shopping for the best possible number is an easy way to improve your winning percentage over the course of an entire season.

• Sports Betting Strategy 6 - The Importance of Units Won

Understanding the importance of units won vs winning percentage will help you evaluate the true worth of any sports betting system.

Here is some websites or companies which provides sportsbook trading/betting.

• StrataBet

• 4lowin2

• BetAngel

-Sports Betting Tips For Profit

[16]Maurizio Montone (2015) taking 82 operators’ as sample data for research on arbitrages and bookmakers’ characteristics. [17]Steven D. Levitt (2004) analyse the betslips breakdown which is similar with section 3 in this paper.

1.2 Value Betting

Section 1.1 Introducing Betting Strategies describe some basic concepts about betting strategies. Now we focus on Value betting and it is the popular and efficient staking strategy since money management is the key for betting strategy.

  It's not a matter of life or death. But if that team, that result or that referee's decision goes against them, the lives of their wives and their children are affected. The mortgage does not get paid. Holidays are cancelled. They are not players or managers. They are football's professional gamblers.

  It is their full-time job to win money betting on the game. There are not many successful enough to survive. It is estimated, by the gamblers interviewed here, that fewer than 3 percent of gamblers who have what it takes to "go pro" can earn a living from betting.

  No wonder they are a secretive, paranoid bunch. Never do they reveal exactly how they win their money or how much. Their greatest secret is what is known as "the edge". That nugget of information which tells them that the odds on the football betting market is wrong. Only then do they hand over their hard-won dough.

  It takes hours of eye-bleeding research to find "the edge". Most pros spend hours, and thousands of pounds, building statistical models. Others will employ specialists—analysts and statisticians—to build a complex algorithm for them. If successful enough, they will attract wealthy investors who will hand over thousands, sometimes millions, to bet for them and be promised a healthy return.

  Tony Bloom, a legendary gambler known as "The Lizard" is one such operator. So revered, Bloom runs Star Lizard, a company that employs a raft of people to analyse football matches for his millionaire-only investors. Bloom is rumoured to be worth more than £1 billion and owns Brighton, the Premier League wannabes.

source : Mugs and Millionaires: Inside the Murky World of Professional Football Gambling

The best and the most successful punters are money managers looking for ideal situations, which are defined as matches with only high percentage of return. In individual situations luck will play into the outcome of an event, which no amount of odds compiling can overcome, but in the long run a disciplined punter will win more of those lucky games than lose.

1.3 Professional Gambler

Nowadays, operates make a lot of restriction to increase their profits. For example: single bet maximum stakes per account, triggers upon staking per bet, single match maximum stakes per account, vigorous/spreads margin (Which will describe in 2.2 Overrounds / Vigorish). As a professional gambler we are require a high level mathematical skill in order to take profit from operators. Below are some articles about sports betting data analysis. - Play Data, Play Ball!Exploring Baseball Data with R - openWAR - How Predictable is the English Premier League? - It’s boffins versus bookies on the World Cup Rankings

As we know George Soros and Jim Rogers are two of most successness punters in financial market while they used to analyse more than 25 companies from financial reports and also their business when they was working in Atom fund. Environment and the life of punters. - Preparing for a Career as a Sports Statistician: Two Interviews with People in the Field - How hedge funds work - Rob Mastrodomenico uses data to estimate the outcomes of sports events for professional punters, and it’s a complicated business - ATASS - Work to have fun - 数学是不是博彩业的水晶球？ - 庞特俱乐部：三年狂赚156亿神秘赌博集团如何“十赌九赢”？

Now that you have some basic betting strategy knowledge and concept, you can try to learn further sportsbook staking modelling to take the challenge.

2.1 Collect and Reprocess the Data

I collect the data-set of World Wide soccer matches from year 2011 until 2015 from a British betting consultancy named firm A. All bets placed by display on HK currency, and the odds price also measure based on Hong Kong price.

I tried to apply RSelenium on RStudio Server Centos7 to scrape the data from live-score website includes the odds price but the binary phantomjs is not available for Linux, and I also not familiar with the installation of Java as well as setting of the path for rJava. Kindly refer to Natural Language Analysis for more information about the teams name matching.

table 2.1.1 : 48640 x 43 : Sample data collected for the research.

  About 90 percent of money wagered will be on the Asian handicap, a market that allows the team expected to win a "head start" of a quarter of a goal or more to the opposition. The rest of the money staked will go on a market for over or under a certain number of goals and the match-result market.

source : Mugs and Millionaires: Inside the Murky World of Professional Football Gambling

In order to analyse the AHOU, here I’ve filtered out all soccer matches other than AHOU which is the table showing above (For example : Corners, Total League Goals etc.) for whole research paper. Please refer to Natural Language Analysis to see the firm A staking raw data-set.

You are feel free to read Asian Handicap and Arbitrage of Synthetic Asian Handicap Bets for some basic lession about Asian Handicap Bets.

2.2 Overrounds / Vigorish

Fair odds: the odds that would be offered if the sum of the probabilities for all possible outcomes were exactly 1 (100%). For example, supposing we had a market with three possible outcomes {A, B, C} with probabilities of success \(P(A) = 0.5, P(B) = 0.4\) and \(P(C) = 0.1\), the fair odds would be 2.00, 2.50, and 10.00 respectively, which are just the inverse of the estimated probabilities.

Overround: Also called vigorish (or vig for short) in American sports betting, the over-round is a measure of the bookmaker’s edge over the gambler. The bookmaker will never offer fair odds on a market. In practice, the payout offered on each selection will be reduced, which in turn increases the reflected probability of an event. When odds have been adjusted in this way the sum of the probabilities for all events will exceed 1 (100%). The over-round is the amount by which the sum of all probabilities exceeds 100% and it is the bookmaker’s profit margin.

For example, if we had a market with two possible outcomes {A, B}, where \(P(A) = P(B) = 0.5\), the fair odds on each selection would be 2.00. However, the bookmaker may offer payouts of 1.85 on each selection. The corresponding probabilities for each selection are now 1/1.85 = 0.5405405, and the sum of the probabilities for all outcomes is 0.5405405 x 2 = 1.0810811. The over-round is 8.1%, and for every $100 paid out by gamblers the bookmaker expects to make a profit of 8.1 dollars, assuming that there are balanced bets on both A and B.

I just simply get the lay price by applying below equation.

\[P_i^{HK_{Lay}} = 1/P_i^{HK_{Back}}-\nu_{j}\] equation 2.2.1

While \(\nu\) is the vigorish and \(j={1,2}\) which are AH=0.1 and OU=0.1. I have just simply calculated the Layed Fair odds (Odds Price with Vigorish which offer by operators), here I apply a setting profile which is term as lProfile (you can casually edit the soccer match profile setting) to get the Real Odds (Net Odds Price without Vigorish). As well as the Value \(Value = Real Price/Fair Odds\). Here we can use the Bet Stake Calculator Kelly Staking Calculator. I simply reverse value \(\Re\) to get the estimated \(P_{i}^{EM}\) (firm A) where we will talk in Section [4.1 Linear Model] and later [4.3 Poisson Modelling] about odds modelling.

table 2.2.1 : 48640 x 43 : Vigorish, price and probabilities sample table.

Above table 2.2.1 just provides some sample about the odds price and over-round while you can refer to table 2.1.1 for details. Meanwhile, you can know more details about the return of investment, convertion and also origin region based on same probabilities among different Odds Types/Styles via Betting Odds Converter or just simply google’ing.

3.1 Summarise Diversified Periodic Stakes

Before we start analyse the staking model, we are firstly see some diversified periodic breakdown Stakes and Profit & Lose of the Agency A.

graph 3.1.1 : Investment Annual summary graph.

From the graph above showing that the investment of firm A through agency A generates a positive return (profit). Please refer to table 4.1.1 for more details about investment analysis.

table 3.1.1 : 55 x 16 : Investment monthly breakdown table.

From the table above, we realized that the Asian agency A make profit by follow the British sports betting consultancy firm A every year. Since thousands of bets (and maximum bet limit setting, league profile setting, and also value betting which properly based on Kelly model, mean value will be kinda bias) placed per month, here we take median will be accurate than mean value.

graph 3.1.2 : Investment monthly trend graph.

## Adding missing grouping variables: `Sess`, `Month`

table 3.1.2 : 383 x 17 : Investment daily breakdown table.

graph 3.1.3 : Investment daily trend graph.

From the graph above, we can easily know the figure of Stakes, Returns and Profit & Lose while below table separate into daily breakdown. The table shows the daily stakes and also quantile values.

3.2 Summarise the Staking Handicap

table 3.2.1a : 30 x 18 : Asian Handicap - handicap breakdown table.

table 3.2.1b : 60 x 18 : Goal Line - handicap breakdown table.

table 3.2.1c : 8 x 7 : Handicap, stakes and PL sample data.

From above tables, firm A mostly placed on Asian Handicap range concedes/taken 0 ball on agency A. Menwhile the odds -0.25 is most profitable from return rate.

Secondly, from the Goal Line mostly taking over selection on 2 balls. (Since Dutch, Japanese, Spanish and Women soccer leagues always scoring more goals, but Portuguese, Italian, French leagues always score less, English leagues average 2.5 balls)

graph 3.2.1a : Asian Handicap - handicap breakdown staking graph.

graph 3.2.1b : Goal Line - handicap breakdown staking graph.

Now we look at the graph above, we can know the Stakes breakdown on both AH and OU.

3.3 Summarise the Staking Prices

table 3.3.1a : 49 x 18 : Asian Handicap - price range breakdown table.

table 3.3.1b : 32 x 18 : Goal Line - price range breakdown table.

table 3.3.1c : 8 x 8 : Price range, stakes and PL sample table.

From above tables, the price range on (0.9,1] are mostly been placed. We try to compare the stakes between 0.70~0.80 and 1.10~1.20, 0.60~0.70 and 1.20~1.30 and the returns/profit, we will know the price is importance on Value Betting.

graph 3.3.1a : Asian Handicap - price range staking graph.

graph 3.3.1b : Goal Line - price range staking graph.

Above graph shows the Stakes and P&L on different price range in MY Odds style. In fact the MY Odds Style will be easier to count and understand in statistics as well as plot graph since the return (both won and lost) will be ONLY from -1 to 1 while HK/Europe Odds Style will count from -1 to Inf. However I keep both HKOdds and MYOdds Please refer to table 2.2.1 for more details.

However, due to consideration of the stakes amount, here I just simply use the HK in order to make the Stakes and Return/PL exactly same with the dataset.

3.4 Summarise the In-Play Staking Timing

table 3.4.1a : 27 x 18 : Asian Handicap - In-Play time range breakdown table.

table 3.4.1b : 23 x 18 : Goal Line - In-Play time range breakdown table.

The table above shows the breakdown stakes on Breaks includes pregames of Extra-Time (started 90 minutes games), Half-Time and Full-Time in both 90 minutes games and also Extra-Time, Injuries-Time, Breaks-Time etc (All stakes after blew game-start whistle and before final result). While No means pre-games stakes and P&L summary.

graph 3.4.1a : Asian Handicap - In-Play time range graph.

graph 3.4.1b : Goal Line - In-Play time range graph.

From the above graph shows the In-Play stakes, the first (0,10] time range placed most stakes while (55,60] start dropping. The <NA> includes all stakes when the soccer players are not playing on the football field. (Pre-games, Half-Time, Full-Time, Extra-Time, Injuries Time, Breaks Time etc.)

3.5 Summarise the In-Play Staking Based on Current Score

table 3.5.1a : 231 x 18 : Asian Handicap - In-Play state-space staking breakdown table.

table 3.5.1b : 341 x 18 : Goal Line - In-Play state-space staking breakdown table.

Above table shows a further details breakdown of In-Play stakes, includes the current scores and also current concedes/given handicap during In-Play while <NA> during Break means Break-Time or pre-Extra-Time etc. The complete data is dim(sample.data) 231 x 18 and 341 x 18 for both AH and OU.

graph 3.5.1a : Asian Handicap - In-Play state-space graph.

graph 3.5.1b : Goal Line - In-Play state-space graph.

Section 3 summarise breakdown tables and also graphs on the investment of firm A. Basically, soccer sports investment need to consider below criteria :

• Handicap in 3.2 Summarise the Staking Handicap
• Price in 3.3 Summarise the Staking Prices
• Timing in 3.4 Summarise the In-Play Staking Timing
• Current Score in 3.5 Summarise the In-Play Staking Based on Current Score

While the further linear model will also take above criteria for investment. You can also refer to my previous research which is Odds Modelling and Testing Inefficiency of Sports-Bookmakers.

7.1 Documenting File Creation

It’s useful to record some information about how your file was created.

• File creation date: 2015-07-22
• File latest updated date: 2016-08-20
• R version 3.3.1 (2016-06-21)
• R version (short form): 3.3.1
• rmarkdown package version: 1.0
• tufte package version: 0.2
• File version: 1.0.0
• Author Profile: ®γσ, Eng Lian Hu
• GitHub: Source Code
• Additional session information

[1] “2016-08-20 18:07:54 JST” setting value
version R version 3.3.1 (2016-06-21) system x86_64, mingw32
ui RTerm
language (EN)
collate English_United States.1252
tz Asia/Tokyo
date 2016-08-20
sysname release version nodename “Windows” “10 x64” “build 10586” “RSTUDIO-SCIBROK” machine login user effective_user “x86-64” “scibr” “scibr” “scibr”

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